|Type of paper:||Research paper|
|Categories:||International relations Debt|
The Greek financial crisis also known as the Greek Depression was a debt crisis faced by Greece after the end of the 2008 financial crisis. The crisis, which had started brewing years ago, reached climax after the government implemented sudden changes and austerity measures that led to a decline in income and value of property (In Floros & In Chatziantoniu, 2017). However, these factors only accelerated the crisis but structural weakness of the country's economy, rigidness of its monetary policy, and underreporting of data on debt levels and deficits were noted as the primary triggers of the crisis. Greece's crisis has attracted world attention given that the country had one of the fastest growing economies and least debt to GDP ratio from 1960 to 1990. Given that Greece is a member of the European Union, it is obvious that the crisis has had significant impacts on other member states. Thus, this paper presents the impacts of the Greek financial crisis on the EU economy over time.
Greece Before the Financial Crisis
Similar to other many European countries, Greece enjoyed high economic growth rate in the 1960s, a period commonly known as the "golden age." During this period, the country had an average annual growth rate of 8%, the growth of investments annually stood at an average of 12%, there were low unemployment rates, low inflation rate, and a surplus budget balance. Also, Greece's GDP per capita was about 80% of the average of the European countries in 1970 (Marangos, 2017). However, the run of Greece as a top performer would soon begin to slow down with the onset of the oil crisis in 1973 that left Greece deeply hurt (Marangos, 2017).
In 1979, Greece entered a period of depression (Romei, 2015). A country's GDP that once grew at an average rate of 8% was now stagnant in 1987 and equal to how it was in 1979, while her neighboring countries recorded massive growth. Its per capita output declined to low levels similar to those noted before the 1960s. In 1981, the European Union welcomed Greece into the union and as noted by Romei (2015), Greece entry into the EU marked the start of its collapse. According to Romei (2015), the 1980s were marked by high inflation rates, high unemployment rates, and low labor productivity compared to other European Union member states. In an attempt to reduce the severity of these impacts, the government employment rate increased at an average rate of 2.3% annually and regulation of the labor and product markets was increased (Marangos, 2017). Greece's Minister for Economy and Finance in 2004-09 opined that "this decade of macroeconomic populism bequeathed Greece with two of the most significant problems that have since burdened its economy: high public debt and low international competitiveness" (Romei, 2015). That increase in public debt is well illustrated in the figure below.
Impacts of the Eurozone on Greek's Debt Crisis
In 2001, the euro was introduced which resulted in significant reduction of trade costs between members of the European Union and an increase in the total trade volume. However, it resulted in an increase in labor costs in peripheral countries like Greece in relation to major economies like Germany, which eroded Greece's competitive ability. That led to a sharp increase in Greece's trade deficit (Hale, 2013).
Typically, a trade deficit indicates that a country's consumption is higher than its production and direct investment or borrowing is required from other states to balance the budget (Hale, 2013). Greek's trade deficit rose sharply from less than 5% of the GDP in 1999 to 15% of the GDP in 2009 (Kashyap, 2015). One of the reasons for the increase in direct investments was its membership in the European Union. As such, investors perceived that the EU would take disciplinary measures against Greece should it fail to honor its debt obligations.
With the spread of the Great Recession in Europe, there was a decline in the money lent to peripheral countries like Greece by major economies like Germany. In addition, the emergence of reports of fiscal mismanagement and deception by the Greek government in 2009 led to the increase in borrowing costs. The combination of these effects took away Greece's ability to borrow to finance its budget deficit and trade deficit affordably (Hale, 2013). Typically, a country faced with the abrupt decline of direct investments and high debt burden devalues its currency to stimulate investments to increase its ability to repay the debt. However, this was not feasible as long as Greece remained in the European Union. In an attempt to increase its competitiveness, Greece implemented a form of deflation whereby the wages reduced by 20% from 2010 to 2014. That resulted in a decline in income and GDP hence a severe recession that was marked by a reduction of tax receipts and high debt to GDP ratio (Hale, 2015).
Effects of Greek's Financial Crisis on the European Union
The biggest decline in Greek's GDP (6.9%) took place in 2011 (European Commission, 2012). In 2011, more than 111,000 Greek companies were declared bankrupt which was an increase of 27% from 2010. That resulted in worsening of the unemployment rates from 7.5% in 2008 to 23.1% in 2012 while the unemployment rate among the youth rose from 22.0% to 54.9% in the same period (Hatzinikolaou, 2012). The worsening economic situation saw Greece default repayment of a $1.7 billion loan to the IMF in 29th June 2015 although the payment was done twenty days later (IMF Says Greece Made Overdue Payments, 2015).
According to Krugman Krugman (2015), Greece can only resolve its debt crisis by exiting the European Union and adopting its old currency (drachma), a move dubbed "Grexit" from the famous Brexit. Grexit would give Greece autonomy over its monetary policies hence allowing it to balance the trade-offs between economic growth and inflation from a national perspective rather than the Eurozone perspective. Similar methods have been implemented before by countries like Canada and Iceland and proven successful. For instance, Iceland filed for bankruptcy in 2008 by devaluing its currency. In 2013, Iceland recorded an annual growth rate of 3.3% (Krugman, 2015). Similarly, Canada devalued its currency in the 1960s which enabled it to improve its budget situation (Krugman, 2015).
Although Grexit would have beneficial impacts on Greece, economists warn that it could have severe effects on the Eurozone (Lachman, 2015; Reinhart, 2015). One, membership in the European Union would cease to be irrevocable and other countries with debt problems like Portugal, Spain, and Italy would be pressured by their electorates to exit or demand debt subsidies. These countries would see an increase in interest rates on their bonds hence making it difficult for them to service the loans. Other impacts would include a change in geopolitics with the most likely being closer ties between Greece and Russia and the souring of relations with the rest of Europe. Also, the EU countries like Germany whose banks and the IMF have the largest share of Greece's debt would incur enormous financial losses. Further, Grexit would mean no access to the global market, the collapse of its financial system (banks), and destruction of IMF's reputation especially the reliability and validity of its austerity strategies (Lachman, 2015; Reinhart, 2015).
Restructuring of EU Debt Strategy
Economists have argued that the only way out for Greece is through a bailout in return for more stringent austerity measures. However, the austerity measures implemented a few years ago have resulted in adverse impacts such as poor economic performance, low wages, the decline in tax collections, and difficulties in servicing the loans. In Karyotis and In Gerodimos (2015) point out that more austerity measures would only be effective if they are accompanied by sufficient reduction in the debt balance. However, it would be difficult to have a sufficient reduction in the debt balance owed under the current situations. In this view, a well-renowned European economist known as Thomas Piketty in July 2015 argued that a European conference about all the Europe's debts is inevitable just like it was after the end of World War II. The conference would emphasize on the need to restructure all debts including those owed by Greece, Italy, Spain, Portugal, and Italy. These countries had started showing signs of defaulting before monetary policies were relaxed by the European Central Bank (IMF Says Greece Made Overdue Payments, 2015). Failure to restructure the debts would force Greece and other countries facing similar problems to exit the EU hence giving the financial markets authority to go after them.
Effects of Greek's Debt Crisis on Strong EU Economies (Germany)
Germany has been a major player and perhaps the biggest beneficiary of Greece's debt crisis. Throughout the period of the Eurozone crisis, Germany was seen by investors as a safe haven which resulted in an increase in investments, increase in exports, and more lending to the peripheral countries (Martin, 2013). As such, Germany has attracted criticism for prioritizing national interest at the expense of exacerbating the Eurozone crisis. In particular, many expect Germany to adjust its fiscal policy in a manner that would help the ailing countries to increase exports and budget surplus hence solve the Eurozone crisis. Rather, Germany is reported to use the European Central Bank to serve her national interests (Hall, 2015).
According to Evans-Pritchad (2012), the success of Germany stems from living within its means while other countries live beyond their means. If Germany is worried that other EU member states are sinking in debt, it should be concerned about the future of the magnitude of its trade surplus. Surprisingly, it is not (Evans-Pritchad, 2012). That is perhaps due to the recent projections by the OECD for the relative export prices which showed that Germany outperformed all other EU countries (Evans-Pritchad, 2012). In this view, Evans-Pritchad (2012) pointed out that Germany has been and will be the most benefactor from the decline of the countries hit by the euro-crisis. If the peripheral countries are to recover, that means that they have to record trade surpluses hence another country must run a deficit. That could be achieved by boosting domestic demand in Germany and allowing higher inflation. However, the current situation does not indicate any willingness by the German government to tolerate a trade deficit (Evans-Pritchad, 2012).
In conclusion, Greece's debt crisis has resulted in significant adverse effects on its economy and to the EU's economy. Increase in unemployment, low wages, homelessness, social unrest, emergence of radical ideas, and increase in popularity of the right wing are just some of the direct effects of the debt crisis. The significance of Greece's debt crisis to the EU stems from the fact that the member states share a common currency and a crisis in one country has huge effects on the strength of the entire economic block. For this reason, solving the debt crisis is not a responsibility for Greece alone but also for the strong economies. Germany has been viewed as the big brother that should bear the most burden by allowing deficits in its current account. For the sustainable growth of the EU block and stability of the euro, Germany should relax regulations that reduce domestic demand and higher prices to increase consumer spending. However, even with the implementation of these policies, Greece would still endure many years of economic turmoil but with the hope of recovery.
European Commission. (2012). Interim Forecast.
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